Hedge Fund Strategies Seek Wider Clientele

"We've seen enough critical mass to justify having this category," says Dan McNeela, a senior analyst at Morningstar.

McNeela says that three funds from Laudus Rosenberg are already part of the category: (MSMNX )Laudus Rosenberg Global Long/ Short Equity , (BMNIX)Laudus Rosenberg Value Long/Short Equity and (SSMNX )Laudus Rosenberg U.S. Large/Mid-Cap Long/Short. Russ Kinnel, Morningstar's head of research, says the firm may also consider including the (BPLSX )Robeco Boston Partners Long/Short Equity Fund and, after reviewing the filing, the new Janus Fund.

Despite the launch of these products, the revolution of hedge-like mutual funds has yet to happen. Why's that?

Part of the problem is the special challenge posed by mixing longs and shorts. "Mutual funds invest thousands of billions of dollars in the market," says Kinnel. "There is a problematic issue there. It's difficult to short stocks that the firm owns."

Another factor is managers' skill. "Shorting is a little bit different than what some of these long-only guys are running. My feeling is that they don't have the expertise," says Kinnel.

When they do have the talent, mutual fund managers tend to leave the established asset-management universe to run their own hedge funds. The best example is Jeff Vinik, former manager of the world's largest mutual fund, Fidelity Magellan, who left to found a successful hedge fund, Vinik Asset Management.

"People who want to run a hedge fund are doing that in the hedge fund universe, where they have the ability to earn higher fees," says McNeela.

J.P. Morgan(JPM) Asset Management appears to have come up with its own answer to the problem. Two years ago, the New York bank bought the hedge fund Highbridge Capital Management. Earlier this month, its asset-management arm issued a prospectus for Highbridge Statistical Market Neutral Fund, a mutual-fund-like hedge fund product that is open to the general public. The fund is managed by Highbridge's managers in a strategy that identifies arbitrage opportunities through the use of mathematical models.

The hedge-like mutual fund segment exists and is gradually growing, Kinnel says. But he doubts it's a major trend. The overall performance of those funds has not been great, he says.

"If asset flow into alternative continues, more funds will go there, but I don't expect the big money managers to dive in," he says.

Another factor has been timing, says Jack Ablin, chief investment officer at Harris Private Bank.

"Retail investors are going to gravitate toward hedge strategy funds when the market is lousy," Ablin says. "Maybe this year could be a good year for these strategies, but the last two years were not."

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